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Can Foreign Aid Accelerate Stabilization?

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  • Casella, Alessandra
  • Eichengreen, Barry

Abstract

This paper studies the effect of foreign aid on economic stabilization. Following Alesina and Drazen (1991), we model ,the delay in stabilizing as the result of a distributional struggle: reforms are postponed because they are costly and each distributional faction • hopes to reduce its share of the cost by outlasting its opponents in obstructing the required policies. Since the delay is used to signal each faction's strength, the effect of the transfer depends on the role it plays in the release of information. We show that this role depends on the timing of the transfer: foreign aid decided and transferred sufficiently early in the game leads to earlier stabilization; but aid decided or transferred too late is • destabilizing and encourages further postponement of reforms.

Suggested Citation

  • Casella, Alessandra & Eichengreen, Barry, 1994. "Can Foreign Aid Accelerate Stabilization?," Institute for Policy Reform Archive 294848, Institute for Policy Reform.
    • Handle: RePEc:ags:inpora:294848
    DOI: 10.22004/ag.econ.294848
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    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F35 - International Economics - - International Finance - - - Foreign Aid

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